Lectorial 3 SM 1 2021

Property and Capital Markets
BUIL1228
Tony McGough
Senior Lecturer, Property Investment
RMIT University, Melbourne
Module 2 Property and Capital Markets
Property Investment Universe
Tony McGough
Senior Lecturer, Property Investment
RMIT University, Melbourne
RMIT Classification: Trusted
Objectives
Aims of this session

– To look at global property markets and the allocation
processes
– To begin to understand why institutions allocate
resources to global property markets
RMIT University 2021 BUIL 1228 Property and Capital Markets, RMIT Property and Valuation Discipline, PCPM 3
Australian Investment Asset Classes
International Shares 20-Year Returns
Cash 10-Year Returns
Global Fixed Interest
Australian Fixed Interest
Australian Listed Property
Residential Investment Property
Australian Shares
- 5.00 10.00 15.00
Source: Russell Investments/ ASX
• Australian institutions have AU$195 billion exposure to the core

property sector, apportioned: office 32%, retail 54% and industrial 14%
Source: Higgins 2013
Australian States: Investment Grade Property: December 2007

Office Retail Industrial
State Area sqm Value $b Area sqm Value $b Area sqm Value $b
New South Wales 6,097,000 48 5,497,000 34 11,903,000 24
Victoria 4,044,000 19 3,377,000 20 9,794,000 13
Queensland 2,508,000 14 4,380,000 22 7,630,000 13
Western Australia 1,339,000 10 2,175,000 10 3,924,000 1
Sub Total 13,988,000 91 15,429,000 86 33,251,000 51

Australian Total 16,079,000 99 17,474,000 96 37,525,000 57
Source: Higgins et al 2008
Global Investment Asset Classes

Global
Global Multi-Asset Returns Comparison
Source: Prudential
Global Property Markets
Reasons
– Growth in organised savings (i.e. superannuation)
– In the past poor equity market performance
– Diminished domestic opportunities in developed

countries
– Improved research: assisting in decision making

process
Benefits
– Increased opportunity and diversity
– Enhanced returns
– Spreading the risk: diversification of returns from

domestic property assets
– Matching asset with liabilities; overseas clients

(investors)

Risks – main areas
– Country: social, political and economical
– Currency: Can be extremely volatile
– Property market; space and property market issues
– Assets Specific asset: quality of construction
– Default risk: tenant, government intervention
– Transparency: accessing information
– Chargeable taxes
– Legal risk: due diligence, government actions
– Local knowledge/presence

US$ Trillion
50
Global
45 US$ 48.7 Trillion
40
35 39%
30 Global
25 US$ 26.6 Trillion
20
27% 27%
15
35%
10
24%
5 28%
0
2012 2021
US and Canada Europe Asia
Further Reading
Pramerica, A Bird’s Eye View of Global Real Estate Markets:, Prudential Real
Estate Investors, New Jersey.
Size of Economy and Transparency – International

Property
First Tutorial Break
Module 2 Property and Capital Markets
Comparing Asset Classes

Cushman & Wakefield Fair Value Index
Methodology
Fair Value Index ranges between 0 and 100

Index Value
15 38 50 63 85 Index Score
1
4 5 5
10
• 100: all markets are Underpriced
5 15
10 • 50: broadly, markets are Fairly priced
15 5
• 0: all markets are Fully priced
10
5 5 4
1
A B C D E
Fully priced Fairly priced Underpriced

Source: Cushman & Wakefield Research
Fair Value approach: compare expected and required returns

Frankfurt offices – 5 year expected and required returns
12% Hot Warm Hot Warm
Hot: >5% Undervalued

10%
Warm: Fair Value +/- 5%
Cold: >5% Overvalued
8%
6%
4%
2%
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011 2012 2013
Required Return Expected Return
Building up required returns – start with 5 year bond yield

Frankfurt offices – required return components
9%
8%
7%
6%
5%
Illiquidity & Risk
4%
Transaction Costs
3%
2% Depreciation
1%
5 Year Bond Yield
0%
2010 2011 2012 2013
Compensation for Depreciation

9%
8%
7%
6%
5% Illiquidity & Risk
4%
Transaction Costs
3%
Depreciation
2%
1% 5 Year Bond Yield
0%
2010 2011 2012 2013
Compensation for Transaction Costs

9%
8%
7%
6%
4%
Transaction Costs
3%
Depreciation
2%
0%
2010 2011 2012 2013
Compensation for Illiquidity and Risk

9%
8%
7%
6%
4%
Transaction Costs
3%
Depreciation
2%
0%
2010 2011 2012 2013
Expected returns come from income yield and capital
value change
Frankfurt offices – expected return components
12%
10%
8%
Capital Value
6% Growth
4%
Income return
2%
0%
2010 2011 2012 2013
Compare expected and required returns

Frankfurt offices – 5 year expected and required returns
12% Hot Warm Hot Warm
Hot: >5% Undervalued

10%
Warm: Fair Value +/- 5%
Cold: >5% Overvalued
8%
6%
4%
2%
0%
2010 2011 2012 2013
Required Return Expected Return
Example: Warsaw Retail is underpriced this quarter

5-year fair and forecast returns (p.a.)
15%
Required
Fair returnreturn
10% Expected
Forecast return
return
5%
0%
5 Year bond yield Depreciation cost Transaction costs Illiquidity & risk
Source: Bloomberg, Cushman & Wakefield Research
Example: Berlin Offices is underpriced

5-year fair and forecast returns (p.a.)
20%
Forecast return
Expected return
15%
Required
Fair return
return
10%
5%
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2011 2012 2013 2014 2015 2016
-5%
5Y bond yield Depreciation cost Transaction costs Illiquidity & risk
Source: Bloomberg, Cushman & Wakefield Research
Key Results
Index score approximately the same level recorded in Q3

2006
• EUROPEAN FAIR VALUE Index All Property, Q3 2018
100
More underpriced
75 markets
50
25 More fully priced

markets
Source: Cushman & Wakefield Research & Insight
Logistics remains the most attractive sector
• Number of markets in each fair value category by sector Q3 2018
13 27 53 Index Score
1 2
10 9
18
17
37
22
offices retail logistics

Fully priced Fairly priced Underpriced
Just 10% of markets are underpriced, mostly in CEE and

Semi-Core
• Number of markets in each fair value category by region, Q3 2018
Other*: Switzerland, Turkey, Russia Source: Cushman & Wakefield Research & Insight
Semi-Core logistics offer interesting opportunities
• Five most under/fully priced markets in Europe, Q3 2018
Top 5 markets (most underpriced) Bottom 5 markets (most fully priced)
01 Dublin logistics 119 Vienna offices

02 Moscow Offices 120 Rome retail
03 Lisbon logistics 121 Milan retail
04 Madrid logistics 122 Istanbul retail
05 Hamburg logistics 123 Istanbul offices
Summary of Key Results

• The all-sector European Fair Value Index score dropped to 28 in Q3 down from our Q2 score of
33, and approximately the same level recorded in Q3 2006, reflecting the advanced stage of the
property cycle and fewer attractive prime opportunities.
• The combination of property yield compression coupled with rising government bond yields has
narrowed the spread between the fair and forecast return further, deteriorating property
attractiveness and causing the index to fall further.
• Opportunities in the logistics sector have reduced dramatically due to continued yield compression.
Geographically, the CEE and Semi-Core have the most under-priced markets while Core markets
such as the UK and France have more fully priced markets.
• The most under-priced European markets in Q3 are Moscow offices, Dublin, Lisbon, Madrid and
Hamburg Logistics experiencing the highest medium term rental growth forecast and yield
compression in 2018.
• Conversely, the top five most fully priced markets in Europe are Vienna offices, Rome retail, Milan
retail, Istanbul(office and retail). Very high bond yields in Turkey have pushed fair returns for
property to more than double our forecast returns. While prime retail in Milan and Rome have
reached their lowest historical yield, with no expectation of further yield compression and modest
rental growth expectations making them look unattractive on a relative pricing basis.
Drivers
5-year government bond yields rose over the quarter, but

remain still at very low levels
• Five year bond yields quarterly bps change, q3 2018 vs q2 2018
100
80
60
40
20
0
-20
-40
in parenthesis
-60 bond yields as at
Q3 2018
-80
NLD (-0.1%)
Finland (0%)
Romania (4.3%)
Spain (0.5%)
Bulgaria (0%)
Denmark (-0.1%)
Swiss (-0.4%)
UK (1.2%)
Germany (-0.1%)
Hungary (3%)
Russia (8.4%)
France (0.2%)
Poland (2.6%)
Italy (2.2%)
Norway (1.5%)
CZE (1.9%)
Belgium (0.1%)
Sweden (0.1%)
Ireland (0%)
Portugal (0.7%)
Austria (0%)
Source: Bloomberg
European property investment volume continued to slide

in Q3 2018
• European investment activity, eur bn
120 350
100 300
250
80
200
60
150
40
100
20 50
0 0
Quarterly 10yr Quaterly Average Rolling Annual (RHS)

Source: RCA (Oct-18)
Yield compression limited to some markets
• Prime yield movement q3 2018 vs q2 2018 basis points
40 OFFICE RETAIL LOGISTICS
20
-20
-40
Each dot
represents
one market
-60
Summary of Drivers
• During the third quarter bond yields moved outward in all European markets, except Romania.
Italian 5-year bond yields rose by 51bps amid political concerns. Toward the end of the third
quarter the Italian government announced a 2019 fiscal deficit target of 2.4%. This was large
larger than expected and is likely to draw criticism from the European Commission.
• Overall, our fair total return ended higher for the majority of the markets driven by government
bond outward yield movements. In addition, our forecast total return has weakened, driven by the
combination of yield compression experienced during last quarter, meaning that our five year
return estimation starts from a lower yield. As a result European property’s attractiveness has
diminished further.
• European investment activity took a rest during Q3 2018. Quarterly transaction volume totalled
€46bn, 34% lower than Q3 2017. The decline in investment activity comes with no surprise as
2017 was a record year, totalling €317bn, and prime product is becoming increasingly scares. The
apparent buyers caution is a good thing, and shows institutional memories of the last crash have
not faded as prime real estate is very expensive and near the end of the cycle
• European property become more fully priced, with 19.5% of markets recording yield compression,
down by an average of 20bps in Q3. We believe yields to have reached their likely floor in the
majority of the European markets we cover. As such, we expect a turn in the yield cycle, with
yields starting to rise in response to higher government bond yields from late 2019. But the short
term correction will be limited.
Outlook
Rental growth prospects are moderate
• Rental growth forecast (average 2019 – 2023, p.a.)
6%
Budapest
4%
Moscow Dublin
2%
0%
Amsterdam
-2% Istanbul
Istanbul
-4%
Office Retail Logistics
Simple Average Min-Max
First rate rise in Eurozone expected at Q3 2019
ECB total assets for Euro Area (EUR Interest rate, central bank policy, end of
trillion) period
5.0 3.0%
Eurozone
4.5
2.5% United Kingdom
4.0
3.5
2.0%
3.0
2.5 1.5%
2.0
1.0% 2019 Q3
1.5
1.0 0.5%
0.5 2019 Q3
0.0%
0.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Bloomberg & Oxford Economics, as at Q3 2018
Prime yields expected to stabilise this year before

moving out in 2019
• European prime yields, year-end weighted average by sector
8%
7%
6%
5%
4%
3%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Office Retail Logistics
Summary of Outlook
• It seems that the pace of economic growth in Europe have peaked. As a result we expect modest
rental growth over the next five years as high rents curtail demand in many of the best locations.
This is reflective of the mature stage of the property market cycle.
• Although the vast majority of markets are clustered around sector averages, there are significant
outliers. In Dublin, for example, we expect the ongoing fast growing economy and lack of good
quality product available to feed through the fastest rent rises in the logistics sector of 3.0% p.a.
for the next five years.
• At the other end of the scale, new development at Schiphol airport will be a drag on Amsterdam’s
logistics rents, expected to decline by 0.5% p.a. While volatile exchange rates and continuous
office development have put pressure on both office and retail rents in Istanbul, expected to
decrease by 2.8% p.a. and 1.5% p.a. respectively.
• ECB forward guidance on interest rates suggests the first rate rise will be in Q3 2019 at the
earliest. As such, in Eurozone markets most property yields move out in 2020 to reflect broader
asset re-pricing, albeit the magnitude of movement is modest to account for the positive yield
spread to bonds.
• BoE – Oxford Economics expects rates to reach 1.5% by mid-2020. However, the monetary
tightening path is still set to be gradual, and sensitive to economic/Brexit related developments.
Our view is that there will be a delayed transmission between interest rate rises and any property
yield correction due to the above average nominal yield gap, amongst other factors.
Conclusion
• There are still opportunities around Europe in
selected markets
• Logistics remains the sector with the highest

number of underpriced markets; CEE and Semi-
Core regions offer interesting opportunities
• The pace of yield shift is slowing due to concerns

European logistics market Fair Value classifications, Q3 2018
over elevated pricing and the limited scope for
further compression in core markets that already
have very low yields;
• Rising bond yields expectations implies that

investors should expect higher required return on
real estate. Therefore, if Government Bond yields
rise and the risk premium remains broadly at
today’s level, then investors will need to have
higher long-term income growth expectations to
justify real estate pricing at today’s levels.
Author:
Riccardo Pizzuti
Senior Analyst
riccardo.pizzuti@cushwake.com
Contacts:
Mark Unsworth Matteo Vaglio Gralin
Head of EMEA Forecasting Associate Director
mark.unsworth@cushwake.com matteo.vagliogralin@cushwake.com
Overall Conclusions
– It is possible to take into account different costs/factors to
help you decide whether a market is a good investment
– Market level analysis but don’t forget each property is

unique. Good investments in weak markets and vice
versa
– Yield compression (downward movement in yield)

provides short term capital value growth
– Yield compression causes longer term drop in income

yield (weaker for covering debt costs etc.)
Where is the market going now
Where is the market going now
• What do you think is fair value now?

• Where do you think yields will go?
• Which should be the lowest yield now?
• Remember this from last week? Why were industrial yields higher then?
8.0
7.0
6.0
5.0
Industrial
4.0
Offices
3.0 Retail
2.0
1.0
0.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Reading
Key References – Industry Reports
DTZ Foresight Fair Value Methodology Q2 2010

PGIM RE Birds Eye View March 2017
JLL Global Real Estate Transparency Index 2016
Cushman and Wakefield European Fair Value Update

Q2 2020
Q4 2020 DNA Real Estate Europe Cushman and
Wakefield
Next Week
In-class Test: First 20 minutes of your lectorial
• Format: Multiple Choice, 20 questions (either on-line or paper based)
• Coverage: Lecture Notes and Tutorial Questions Weeks 1-3
• Resources: Calculator (Non-programmable); laptop/ tablet; pen
Mobile phones cannot be used to complete test or as calculators.
No notes to be used
Mobile phones are to be turned off.
Wireless connection: ensure your laptops/ tablet is connected to RMIT wireless network
before you come to class. Wireless network at RMIT www1.rmit.edu.au/its/wireless User
guides to connect your computer or mobile device * www1.rmit.edu.au/its/wireless/guides
• Test instructions include:
– This test is to be completed in class.
– This test has a time limit of 20 minutes.
– This test will save and be submitted automatically when the time expires.
– Once started, this test must be completed in one sitting. Do not leave the test before
clicking Save and Submit.
– Questions will be displayed one at a time. Click Save answer after each question.
Second Tutorial Break

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Property and Capital Markets

Property Investment Universe

Aims of this session

Australian Investment Asset Classes

International Shares 20-Year Returns

Cash 10-Year Returns

Global Fixed Interest

Australian Fixed Interest

Australian Listed Property

Residential Investment Property

- 5.00 10.00 15.00

Source: Russell Investments/ ASX

Australian Investment Asset Classes

• Australian institutions have AU$195 billion exposure to the core

Source: Higgins 2013

Australian Investment Asset Classes

Australian States: Investment Grade Property: December 2007

Sub Total 13,988,000 91 15,429,000 86 33,251,000 51

Source: Higgins et al 2008

Global Investment Asset Classes

Global Multi-Asset Returns Comparison

Global Property Markets

– Growth in organised savings (i.e. superannuation)

– In the past poor equity market performance

– Diminished domestic opportunities in developed

– Improved research: assisting in decision making

Global Property Markets

– Increased opportunity and diversity

– Spreading the risk: diversification of returns from

– Matching asset with liabilities; overseas clients

Global Property Markets

Global Property Markets

US and Canada Europe Asia

Global Property Markets

Global Property Markets

Size of Economy and Transparency – International

First Tutorial Break

Comparing Asset Classes

Cushman & Wakefield Fair Value Index

Fair Value Index ranges between 0 and 100

10 • 50: broadly, markets are Fairly priced

Fully priced Fairly priced Underpriced

Fair Value approach: compare expected and required returns

Hot: >5% Undervalued

Building up required returns – start with 5 year bond yield

Source: Cushman & Wakefield Research

Compensation for Depreciation

5% Illiquidity & Risk

1% 5 Year Bond Yield

Source: Cushman & Wakefield Research

Compensation for Transaction Costs

5% Illiquidity & Risk

1% 5 Year Bond Yield

Source: Cushman & Wakefield Research

Compensation for Illiquidity and Risk

5% Illiquidity & Risk

1% 5 Year Bond Yield

Source: Cushman & Wakefield Research

Compare expected and required returns

Hot: >5% Undervalued

Example: Warsaw Retail is underpriced this quarter

Example: Berlin Offices is underpriced

Index score approximately the same level recorded in Q3